According to the Taylor Rule, if current inflation is 2.5 percent, the target inflation rate is 2 percent, and output is 1 percent above potential, the Fed should target the federal funds rate at 5.25 percent.

Question

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The Taylor Rule suggests that the federal funds rate should be set at 2 percent plus the inflation rate plus half the output gap. In this case, the inflation rate is 2.5 percent, the target inflation rate is 2 percent, and output is 1 percent above potential. Therefore, the Fed should target the federal funds rate at 5.25 percent.

According to the Taylor Rule, If Current Inflation Is 2